July to September 2017 Volume 18 Number 2

Transcription

1 July to September 2017 Volume 18 Number 2

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3 Overview During the September 2017 quarter, (BOJ) implemented new initiatives to strengthen the transmission of the policy interest rate to market rates. These initiatives included the transition of the policy interest rate to the overnight deposit rate from the rate paid on the Bank s 30 day certificates of deposit (CDs) on 01 July The 30-day CDs continued to be offered after this change, but through fixed volumes competitive bid multiple-price auctions.and no longer as fixed price unlimited volume instruments. The Bank also eased monetary policy during the quarter. On 25 August 2017, the new policy rate was reduced by 25 basis points to 3.50 per cent. Concurrently, the standard interest rate on the Bank s overnight Standing Liquidity Facility was lowered by 25 basis points (bps) to 6.50 per cent, thereby maintaining the width of the interest rate corridor at 3.0 percentage points (pps). This monetary policy action reflected the Bank s assessment that inflation for the next four to eight quarters will remain within the target range of 4.0 per cent to 6.0 per cent and was consistent with the Government s continued strong commitment to continued fiscal consolidation. Annual inflation was 4.6 per cent at September 2017, compared to 4.4 per cent at June 2017 and 1.9 per cent at September The uptick in inflation relative to the previous quarter predominantly reflected the impact of higher energy and transport-related costs associated with higher international crude oil prices as well increases in agricultural food prices associated with the lagged impact of flood rains in May The measure of core inflation that abstracts from the influence of agriculture and energy prices was 2.6 per cent at September 2017, relative to 2.4 per cent at June Of note, core inflation has remained below 3.0 per cent since March 2016, which is a signal of continued tight domestic demand conditions. This reflected, inter-alia, the Government s fiscal consolidation efforts which have restrained the pass-through of exchange rate changes to domestic prices. The Bank projects that inflation will remain within the target range over the remaining four quarters, despite the lagged effects of agriculture supply shocks and improved demand conditions. The risks to the forecast over the next four quarters are assessed to be balanced. Reflecting the impact of continued strong performance in tourism-related activities and, to a lesser extent, improved manufacturing activities, real domestic activity is estimated to have grown within the range of 0.5 per cent to 1.5 per cent in the September 2017 quarter, a slower pace of expansion compared with growth in the September 2016 quarter. All industries are estimated to have grown in the review quarter, with the exception of Mining & Quarrying, Agriculture, Forestry & Fishing and Producers of Government Services. For FY2017/18, real GDP is forecasted to expand within the range of 1.0 per cent to 2.0 per cent, primarily reflecting growth in Hotels & Restaurants, Mining & Quarrying, Manufacture and Electricity & Water Supply. This forecast is predicated on sustained growth in the economies of Jamaica s main trading partners as well as continued improvements in domestic labour market conditions. In addition, positive trends in business and consumer confidence should be conducive to an increased level of domestic and foreign investment, which would serve as an impetus to increased economic activities over the near- to medium-term. The Bank will maintain its generally accommodative policy stance in the context of the relatively stable outlook for inflation over the next four to eight quarters as well as the weak, albeit improving, state of the domestic economy. However, the Bank will act promptly to address any undesirable risks to inflation that may emerge. This policy approach will continue as the Bank seeks to mitigate any upside risks to inflation in order to concretize the benefits of low and stable inflation expectations over the near- to medium-term. Brian Wynter Governor

4 Contents 1.0 Inflation 1 Inflation Developments 1 Inflation Outlook & Forecast 2 Inflation Risks 3 Box 1: Businesses Inflation Expectations Survey International Economy Trends in the Global Economy 6 Advanced Economies 6 International Financial Markets 8 Commodity Prices Terms of Trade Jamaican Economy Real Sector Developments 11 Aggregate Supply 11 Aggregate Demand 14 Real Sector Outlook Monetary Policy, Money and Financial Markets 15 Monetary Policy 15 Financial Markets 17 Foreign Exchange Market 17 Equities Market 19 Private Sector Credit and Lending Rates 20 Money 22 Box 2: Credit Conditions Survey 24 Box 3: Jamaica s Macroeconomic Programme under the new SBA Fiscal Developments Implications for Monetary Policy 31 Main Policy Considerations 31 Prices and Output 31 Expectations 31 Financial Markets 32 Monetary Targets 32 Monetary Policy Outlook 32 Box 4: Monetary Policy Transmission 32 Additional Tables 34 Glossary 48 List of Boxes 52

5 ABBREVIATIONS ARMI B-FXITT BOC BOJ BoJ BPO BRO bps CDs CDI CIS CPI CPI-F CPI-FF CSI CY DIJA ECB EFF EFR EMBI+ EPI ETF EU Fed FOMC FY GDP GOJ GOJGBs IES IMF IPI IRC ITES JCC JMD JSE Agricultural Raw Materials Index s Foreign Exchange Intervention & Trading Tool Bank of Canada Bank of Japan Business Process Outsourcing Bi-monthly repurchase operations Basis points Certificates of Deposit Credit Demand Index Collective Investment Scheme Consumer Price Index Consumer Price Index without Fuel Consumer Price Index without Food and Fuel Credit Supply Index Calendar Year The Dow Jones Industrial Average European Central Bank Extended Fund Facility Excess funds rate JP Morgan Emerging Market Bond Index Export Price Index Exchange-traded funds European Union Federal Reserve Bank Federal Open Market Committee Fiscal Year Gross Domestic Product Government of Jamaica Government of Jamaica Global Bonds Inflation Expectations Survey International Monetary Fund Import Price Index Interest Rate Corridor Information Technology Enabled Services Jamaica Chamber of Commerce Jamaica Dollar Jamaica Stock Exchange

6 LME MonMod NAIRU NDA NIR o/w OBR OMO PBOC PMI QCCS QPC QQE REITS SCT SDRs SEZ SLF SMEs T-Bill TAJ TOT USA USDA USTBs VR-CDs WTI London Metal Exchange BOJ s Macroeconomic Model Non-Accelerating Inflation Rate of Unemployment Net Domestic Assets Net International Reserve Of which Office for Budget Responsibility Open Market Operations People s Bank of China Purchasing Managers Index Quarterly Credit Condition Survey Quantitative Performance Criteria Quantitative and Qualitative Easing Real Estate Investment Trusts Special Consumption Tax Special Drawing Rights Special economic zones Standing Liquidity Facility Small and Medium-sized Enterprises Treasury Bill Tax Administration of Jamaica Terms of Trade United States of America United States Department of Agriculture US Treasury bonds Variable Rate Certificates of Deposit West Texas Intermediate

7 Quarterly Monetary Policy Report July to September Inflation Annual inflation was 4.6 per cent at September 2017, within the target range for FY2017/18 of 4.0 per cent to 6.0 per cent. This outturn represented an uptick, relative to the 4.4 per cent inflation rate recorded at June 2017, which reflected increases in all the divisions of the CPI, in particular agricultural prices, electricity costs, fuels and transportation costs. The Bank is forecasting inflation over the next four to eight quarters to be within the range of 4.0 per cent to 6.0 per cent. The forecast is largely predicated on international commodity prices remaining at moderate, though increasing levels. Recent Developments The annual point to point inflation rate at September 2017 was 4.6 per cent, an uptick relative to the 4.4 per cent recorded at end-june 2017 and 1.9 per cent at September The uptick in inflation relative to the preceding quarter largely reflected the impact of higher energy & transport costs and higher agricultural food prices. Higher energy & transport costs was associated with higher international crude oil prices while the increase in agricultural food prices was associated with the lagged impact of flood rains in May 2017 (see Figure 1 and Box 1). All measures of core inflation have remained below 4.0 per cent. Relative to June 2017, the Bank s main measure of core inflation, the CPIAF, (inflation that excludes the influence of agriculture and energy prices) increased marginally to 2.6 per cent at September 2017 (see Table 1). This is consistent with the weak albeit improving domestic demand conditions. The relative stability in underlying inflation is consistent with continued tight demand conditions in the context of ongoing fiscal restraint, which aid in fostering a lower exchange rate passthrough to domestic prices. Of note, abstracting from the recent agricultural price increases, CPI without agriculture decelerated to 3.2 per cent as at September 2017 relative to 3.7 per cent as at June Table 1: Inflation and Major Components (Annual point-to-point per cent change) Headline Core * FNB ** HWEG ** Sep Dec Mar Jun Sept Target FY2017/18 : 4.0 to 6.0 Source: STATIN & BOJ Notes: [*] Core inflation represents that portion of headline inflation that excludes the influence of agriculture and energy related services such as electricity and transport. [**] FNB (Food & Non-Alcoholic Beverages) and HWEG (Housing, Water, Electricity Gas & Other Fuels) are major components of the Consumer Price Index (CPI) basket. 1

8 Quarterly Monetary Policy Report July to September 2017 Figure 1: Component Contributions to Inflation (Annual point-to-point per cent change) Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Source: STATIN & BOJ Figure 2: Vegetables and Starchy Foods Supply Index (Base year = September 2010) Mar-15 Agriculture (8.0%) Energy & Transport (20.0%) Processed (30.8%) Services (Other) (36.1%) Durables (5.1%) Jun-15 Sep-15 Dec-15 Mar-16 Source: RADA & BOJ Calculations The Indices represent a quarterly average of supply (in tonnes) for selected vegetables and starches provided by RADA that have been weighted according to STATIN CPI weights and indexed to September The uptick in inflation for the September 2017 quarter primarily reflected higher domestic agricultural and processed food prices. Higher domestic agricultural prices continued to reflect the lagged impact of flood rains in May and June 2017 which adversely affected most crops and the road infrastructure (see Figure 2). The higher inflation emanating from processed food items was due to the lagged impact of higher international grains prices in the previous quarter (see International Developments section and Figure 3). Partly Jun-16 STARCHY FOODS Sep-16 Dec-16 Inflation Mar-17 VEGETABLES Jun-17 Sep-17 Dec-17 offsetting the increase in inflation in the September 2017 quarter was a reduction in the rate of increase in electricity rates, which emanated from a decline in international crude oil prices in the previous quarter. Figure 3: Energy Price Indices (Base year = March 2008) FUEL (JPS) Kerosene WTI Annual point-to-point outturn. Source: Petrol Diesel Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 The Bank s Survey of Businesses Inflation Expectations (IES) for July 2017 indicated that inflation expectations increased slightly relative to the June 2017 survey. Perceptions of inflation 12 months ahead increased to 3.9 per cent from the 3.5 per cent indicated in the June 2017 survey. Most respondents expect that the cost of stock replacement over the next twelve months will reflect the highest increase among input factors. The survey revealed, however, that increases in wages and salaries was considered likely by the smallest proportion of the respondents. (see Box 1: Businesses Inflation Expectations Survey). Inflation Outlook & Forecasts Inflation is expected to remain unchanged for the December 2017 quarter before moderating to end the fiscal year at 4.4 per cent, a downward revision relative to the 4.6 per cent forecasted in July. This revised outlook is predicated on weaker than anticipated domestic demand conditions during the first half of the fiscal year as well as the slower than anticipated depreciation in the domestic currency. In addition, the outlook for international oil prices 2

9 Quarterly Monetary Policy Report July to September 2017 remains moderate, albeit marginally higher relative to the July forecast (see Figure 4). The deceleration in inflation is also predicated on a decline in agricultural food prices (on a monthly basis) as agricultural supplies improve and the impact associated with May 2017 flood rains dissipates. Figure 4: Inflation Performance (Annual point-to-point outturn for each fiscal year) Inflation Risks The risks to inflation for the next four quarters are considered to be balanced. The upside risks (higher inflation) take into account worse than anticipated weather, stronger than expected demand conditions and higher than projected international commodity prices. In contrast, the downside risks (lower inflation) include the possibility of quicker than anticipated recovery of agricultural sector following flood rain damage, lower than projected international commodity prices and weaker than anticipated demand conditions. Source: The graph reflects how the actual inflation outturn for each quarter compares to the fiscal year (FY) target bands which are set at the beginning of each fiscal year. In the context of continued subdued inflation expectations and core inflation, the Bank currently assesses that underlying inflation over the next two quarters is approximately 4.0 per cent. Of note, for the September 2017 quarter, annualized month over month seasonally adjusted inflation was 4.2 per cent. The Bank s forecast for underlying inflation, therefore assumes relative stability over the next two quarters. Inflation is expected to be slightly suppressed around 4.5 per cent over the next 2 years and gradually approach the 5.0 per cent target level by FY2019/20. This forecast is underpinned by anticipated moderate increase in external prices. Additionally, continued efforts at fiscal restraint and strategic monetary policy actions are expected to assist in tempering price increases. 3

10 Quarterly Monetary Policy Report July to September 2017 Box 1: Businesses Inflation Expectations Survey July 2017 Overview The Bank s Survey of Businesses Inflation Expectations (IES) for July 2017 indicated that inflation expectations remained relatively subdued. Perceptions of inflation 12 months ahead remained marginally below 4.0 per cent. For CY2017, firms moderated their outlook for inflation to below 2.0 per cent. As was the case in the previous survey, respondents expect the cost of utilities and stock replacement to reflect the highest increases among input factors over the next twelve months. There was an increase in the proportion of respondents anticipating higher wages during the year. Thirty seven (37.2) per cent of the respondents anticipated an increase in wages relative to 31.3 per cent in the June 2017 survey. The expected average increase in wages rose to 6.6 per cent relative to the 5.9 per cent in the previous survey. Wages & salaries was, however, the input cost least expected to increase over the next twelve months. Inflation Expectations In the July 2017 survey, businesses expected an inflation rate for CY2017 of 1.8 per cent. This was below the annual point to point inflation rate at July 2017 of 4.5 per cent and marginally lower than the 2.0 per cent estimated in the June 2017 survey. Respondents expectation of inflation 12 months ahead increased to 3.9 per cent, relative to 3.5 per cent in the June 2017 survey (see Figure 1). Figure 1: Expected 12-Month Ahead Inflation Question: Based on the average monthly inflation for the last 12 months, what do you think the average monthly rate will be for the next 12 months? Perception of Inflation Control The index of inflation control declined marginally when compared to the June 2017 survey outturn (see Figure 2). This outturn reflected a marginal decline in the share of respondents who were satisfied with the authorities control of inflation. Figure 2: Perception of Inflation Control Question: How satisfied are you with the way inflation is being controlled by the Government? Source: Businesses Inflation Expectations Survey Notes: The Index of Inflation Control is calculated as the number of satisfied respondents minus the number of dissatisfied respondents plus 100 Exchange Rate Expectations Relative to the June 2017 survey, respondents expected a slower pace of depreciation in the exchange rate over all time horizons (see Table 1). Table 1: Exchange Rate Expectations Question: In June 2017 the exchange rate was J$ = US$1.00. What do you think the rate will be for the following time periods ahead, 3-month, 6-month and 12- month? Periods Ahead Expected Depreciation (%) Mar-17 May-17 Jun-17 Jul-17 3-Month Month Month Source: Businesses Inflation Expectations Survey. Note: The responses have been converted to percentage change. Source: Businesses Inflation Expectations Survey 4

11 Quarterly Monetary Policy Report July to September 2017 Interest Rate Expectations 1 The majority of respondents expected the Bank s OMO rate to remain unchanged. Additionally, the 180-day Treasury Bill (T-Bill) yield, three months ahead, was expected to remain constant at 6.4 per cent as was reflected in the June 2017 survey. Figure 4: Future Business Conditions and Real GDP (Index- LHS and GDP RHS) Question: Do you think that in a year from now business conditions will get better or get worse than they are at present? Perception of Present and Future Business Conditions In the July 2017 survey, perceptions of present business conditions improved as the proportion of respondents of the view that conditions are better rose. Contrastingly, the perception of future business conditions worsened marginally as the proportion of respondents who believe that conditions will be better declined relative to the June 2017 survey. For the past four years, both indicators have been on an upward trend (see Figures 3 and 4). Source: Businesses Inflation Expectations Survey Note: Rates on foreign currency personal loans were not collected. Figure 3: Present Business Conditions and Real GDP (Index- LHS and GDP RHS) Question: In general do you think business conditions are better or worse than they were a year ago in Jamaica? Expected Increase in Operating Expenses Similar to the views expressed in the June 2017 survey, respondents indicated that they expected the largest increase in production costs over the next 12 months to emanate from stock replacement. This was followed by costs for utilities while the least was wages/salary costs (see Table 2). Table 2: Expectations about Operating Expenses Question: Which input do you think will have the highest price increase over the following time periods? 2 May-17 Jun-17 Jul-17 Source: Businesses Inflation Expectations Survey Utilities Wages/Salaries Fuel/Transport Stock Replacement Raw Materials Other Not Stated Source: Businesses Inflation Expectations Survey 1 Question: In June 2017 the 180-day T-bill rate was 6.1 per cent. What do you think the rate will be for the next 3 months and 6 months? 2 The 3-month, 6-month and 12-month horizons. 5

12 Quarterly Monetary Policy Report July to September International Economy Global economic growth for the September 2017 quarter is estimated to have accelerated relative to the previous forecast but remained unchanged relative to the June 2017 quarter. This acceleration was underpinned by stronger expansion in a number of economies, offset by weaker growth in the UK. The slowdown in economic activity in the UK reflected deceleration in the growth in consumption spending. The equities markets in the US and the Euro Area continued to grow strongly. Globally, there was also increased demand for risky assets as well as for a number of sovereign bonds given improved economic and political developments in most economies during the quarter. Against this background, projects that the global economy will remain buoyant over the next eight quarters with risks skewed to the downside. Trends in the Global Economy Global growth for the September 2017 quarter is estimated at 3.3 per cent, unchanged from the June 2017 quarter but higher than previously forecast. This estimate is underpinned by stronger growth in a number of economies, including Canada and the Euro Area, the impact of which was partly offset by weaker growth in the US and the UK. Table 2: Overview of Selected Variables (Per Cent) GDP Actual Current Forecast Previous Forecast as at 25 Jul.17 World USA Canada Japan UK Euro China Inflation USA Canada Japan UK Euro China Source: (BOJ) and Bloomberg In the context of the outturn for the September 2017 quarter, the projected global growth rate for 2017 was revised upwards by 0.1 percentage point to 3.4 per cent (see Table 2 and Figure 5). Figure 5: Global Economic Growth World Growth (BOJ) USA Source: United States of America (USA) Real output growth for the US in the September 2017 quarter is estimated to have moderated to 3.0 per cent, following an expansion of 3.1 per cent in the previous quarter. This deceleration mainly reflected lower growth in consumption spending, nonresidential fixed investment and exports the impact of which was partially offset by an 6

13 Quarterly Monetary Policy Report July to September 2017 acceleration in private inventory investment and imports 1. Table 2: Unemployment Rate for Selected Economies (Quarterly Average Per Cent) USA Canada Euro Sep Dec Mar Jun Sep * 9.1* Source: Official statistics offices, *Bloomberg Consensus forecasts projects that the US economy will expand by 2.1 per cent in 2017, unchanged from the previous forecast. Over the next eight quarters (December 2017 quarter to September 2019 quarter) the Bank projects quarterly US GDP growth within the range of 1.8 per cent to 2.4 per cent. This pace is broadly consistent with the growth rate over the previous four quarters and is expected to exceed potential output growth. Growth in consumption spending over the next eight quarters is anticipated to be lower than earlier projected, the impact of which will be partially offset by an improvement in net exports as a consequence of a more depreciated US dollar. The unemployment rate in the US at September 2017 was 4.2 per cent, broadly in line with BOJ s forecast. Of note, the quarterly average for the September 2017 quarter was 4.3 per cent (see Table 2). The outturn reflected higher employment in health care and transportation & warehousing. The unemployment rate is projected to end FY2017/18 at 4.2 per cent, 0.3 percentage points below end-fy2016/17. In this regard, the US unemployment rate is projected to be below the Bank s previous forecast over the next eight quarters. Annual inflation in the US at September 2017 accelerated to 2.2 per cent from 1.6 per cent at June The Bank projects US inflation to remain below the Fed s 2.0 per cent long run target over the next eight quarters. 2 United Kingdom (UK) The UK economy is estimated to have expanded by 1.5 per cent for the September 2017 quarter, a weaker pace of growth when compared to the expansion of 1.7 per cent in the previous quarter. Growth in the UK continued to decelerate because of subdued consumer spending. The Bank s projection for growth in the UK economy for 2017 has been revised downwards to 1.5 per cent on account of the weaker than expected performance to date. Over the next eight quarters, growth in the UK is likely to slow as negotiations surrounding BREXIT continue. Canada Economic growth in the Canadian economy for the September 2017 quarter is estimated to have tempered to 2.5 per cent, when compared to the outturn of 4.5 per cent for the June 2017 quarter. On 06 September 2017, the Bank of Canada (BOC) increased the target for its becnhmark overnight rate by 50 basis points (bps) to 1.00 per cent (see Figure 6). 3 For the next eight quarters, the GDP growth in Canada is projected to be in the range of 2.0 per cent to 2.1 per cent. 1 This outturn is based on the first of three estimates of US GDP. 2 Consensus forecast and the Federal Reserve have projected that US inflation will end 2017 at 1.7 per cent and 1.6 per cent, respectively. 3 According the BOC, economic data have been stronger than anticipated and supported the Bank s view that growth is becoming more broadly-based and self-sustaining. Consumer spending remains strong and there a strengthening in business investment and exports. 7

14 Quarterly Monetary Policy Report July to September 2017 Figure 6: Policy Interest Rates, monthly data (Per cent) Figure 7: Selected Average Sovereign Bond Yields (Per cent) Sep-2013 Dec-2013 Mar-2014 Jun-2014 Sep-2014 Dec-2014 Mar-2015 Jun-2015 Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 Mar-2017 Jun-2017 Sep USA UK Euro area Canada Japan China (RHS) Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 EMBI+ GOJGB US Treasuries (RHS) Source: Bloomberg Source: Bloomberg International Financial Markets The yield-spreads on GOJ Global Bonds (GOJGBs), relative to selected benchmarks, fell during the September 2017 quarter. This was indicative of lower sovereign risk, which reflected the continued confidence in the Jamaican economy in the context of the country s positive performance under the 3- year Stand-By Arrangement (SBA) with the International Monetary Fund (IMF). 4 At September 2017, the spreads between the indicative yields on GOJGBs and US Treasury Bills and between GOJGBs and the JP Morgan Emerging Market Bond Index (EMBI+) fell by 42 basis points (bps) and 24 bps, respectively, when compared to June 2017 to 3.47 per cent and per cent. These changes were reflected in respective declines of 38 bps and 14 bps in the average yields on the GOJGBs and EMBI+, while the yields on the US Treasuries increased by 4 bps over the period (see Figure 7). The lower yields on emerging market bonds continued to reflect confidence in the growth prospects of these economies. US Treasuries were adversely impacted mainly by the confrontations between the US and North Korea as well as public discourse about the US and Russia. The increase in yields was also underpinned by the market s anticipation of another interest rate hike in 2017 and the Federal Reserve s unwinding of its balance sheet. The performance of selected stock market indices were strong during the September 2017 quarter. Compared to the June 2017 quarter, the Dow Jones Industrial Average (DJIA), S&P 500, the FTSE 100 and the Eurofirst 300 advanced by 4.9 per cent, 4.0 per cent, and 0.8 per cent and 2.2 per cent, respectively. On a yearly basis the DJIA, S&P 500, FTSE 100 and the Eurofirst 300 increased by 22.4 per cent, 16.2 per cent, 6.9 per cent and 12.9 per cent, respectively (see Figure 8). The improvement in US stocks was largely led by technology shares. Healthcare, financial and energy stocks also advanced during the review quarter. 4 An IMF staff team visited Jamaica from 5 15 September, 2017, to conduct discussions on the second review of Jamaica s financial and economic program supported by the IMF s precautionary SBA which confirmed that all quantitative performance criteria and structural benchmarks at end-june 2017 were met. Jamaica s economic program continues to deliver strong results, supporting high confidence and increasing job creation. Jamaica raised US$869.0 Million in the global capital market by reopening two of its already issued Eurobonds maturing in 2028 and 2045 respectively, at a premium. 8

15 Quarterly Monetary Policy Report July to September 2017 Figure 8: Selected Stock Market Indices (Year over-year Per cent) Source: Bloomberg DJIA S&P Eurofirst 300 FTSE 100 Sep-2013 Dec-2013 Mar-2014 Jun-2014 Sep-2014 Dec-2014 Mar-2015 Jun-2015 Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 Mar-2017 Jun-2017 Sep-2017 Commodity Prices Commodity prices reflected a general decline during the review quarter. The daily average of West Texas Intermediate crude oil prices for the September 2017 quarter declined by 0.2 per cent, relative to the same measure for the June 2017 quarter, but increased by 7.3 per cent relative to the September 2016 quarter. At end-september 2017, the price of crude oil on the international market was US$51.67 per barrel. In addition, average grains prices increased by 1.0 per cent and 1.7 per cent on an annual and quarterly basis, respectively (see Figure 9). Terms of Trade Jamaica s Terms of Trade Index (TOT) contracted at an annual pace of 0.4 per cent for the September 2017 quarter, relative to an annual reduction of 5.7 per cent registered for the June 2017 quarter. This reflected an increase of 4.3 per cent in the Import Price Index (IPI), the impact of which was partly offset by an increase of 3.9 per cent in the Export Price Index (EPI). The increase in export prices was driven by aluminium prices, while the expansion in the IPI emanated from higher prices for food-related consumer goods, fuel, capital goods and raw materials. For FY2017/18, Jamaica s Terms of Trade Index (TOT) is projected to improve by 2.1 per cent, relative to the previously projected improvement of 3.2 per cent. This more subdued outlook emanated from an upward revision to the Import Price Index (IPI) mainly reflecting the revised forecast for crude oil prices. This impact was partly offset by an upward revision to the Export Price Index (IPI). Consistent with the outlook for the fiscal year, the Bank expects that Jamaica s TOT will improve over the ensuing eight quarters, beginning in the September 2017 quarter. This mainly reflects an improvement in both the IPI and EPI. Figure 9: The Bank s Price Indices for Imported Commodities Sources: Bloomberg, World Bank and BOJ The decline in average crude oil prices for the review quarter occurred in the context of (i) weaker energy demand concerns 5 ; (ii) the market s reaction to data which showed that the Organization of the Petroleum Exporting Countries (OPEC) expanded by 173,000 barrels per day to million barrels in July 2017 and reports of a further increase in September 2017; and (iii) the market s reaction to the US Energy Information Administration s (EIA) forecast published on 07 August 2017 which showed an upward revision in US crude output for 2017 and Fuel Sub-Index Agricultural Raw Material Index Sep-2013 Dec-2013 Mar-2014 Jun-2014 Sep-2014 Dec-2014 Mar-2015 Jun-2015 Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 Mar-2017 Jun-2017 Sep-2017 Dec-2017 Mar-2018 Jun-2018 Sep Weaker energy demand concerns following (i) reports that Chinese oil refineries in July operated at the slowest daily rates in 10 months; (ii) the closure of several major US oil refineries in Texas and Louisiana due to the passage of Hurricane Harvey and; (iii) market speculation that the passage of Hurricane Irma could adversely impact gasoline demand in the US. 6 Notwithstanding the decline in the average price for the quarter, there were upward price pressures emanating from renewed expectations that OPEC and non-opec producers will extend output cuts beyond March 2018 as well as the market s response to data which indicated that US crude oil and gasoline stockpiles 9

16 Quarterly Monetary Policy Report July to September 2017 The increase in average grains prices reflected higher prices for wheat and soybean, the impact of which was partly offset by declines in corn prices. The average price of corn for the review quarter declined by 4.2 per cent when compared with the same measure for the previous quarter. The average of soybean prices increased at a quarterly rate of 3.3 per cent. The increase in wheat prices for the quarter reflected market speculation of reduced production prospects for spring wheat, resulting from drought conditions in North America and Europe 7. Average aluminium prices for the review quarter recorded increases of 24.0 per cent and 5.4 per cent, relative to the September 2016 and the June 2017 quarters, respectively. This outturn largely reflected a fall-off in Chinese production due to reforms to their production processes. 8 The monthly average of crude oil prices for FY2017/18 is projected to increase in the range per cent, while the change in average price of grains is projected in the range Based on the outlook for increased global supplies the risks to commodity prices over the next eight quarters are skewed to the downside. have declined more than anticipated. Consequently, WTI prices increased by 12.2 per cent (p-t-p) for the September 2017 quarter. 7 Drought conditions persisted in North Dakota for the period June 2017 August One of China s largest producers, Chinalco, began cutting output two months earlier than stipulated by Chinese authorities. Additionally, speculation that an environmental clampdown by the Chinese government will lead to a shortage of also helped to bolster aluminum prices. 10

17 Quarterly Monetary Policy Report July to September Jamaican Economy Following a marginal decline in the June 2017 quarter, the Jamaican economy is estimated to have grown within the range of 0.5 per cent to 1.5 per cent for the September 2017 quarter. This, however, represented a deceleration relative to the growth in the corresponding quarter of 2016, largely reflecting the continued impact of the agriculture shock as well as production delays in the mining sector. In addition, Government operations continued to weigh on growth. All industries are estimated to have grown for the review quarter, with the exception of Mining & Quarrying, Agriculture, Forestry & Fishing and Producers of Government Services. The expansion in Aggregate Demand during the period was mainly attributed to growth in external demand and private consumption, the impact of which was partly offset by estimated declines in investment spending and government consumption. For FY2018/19 and over the medium-term, economic growth is forecasted to be in the range of 2.0 per cent to 3.0 per cent, chiefly reflective of expansions in Mining & Quarrying, Hotels & Restaurants, Agriculture, Forestry & Fishing, Manufacturing and Electricity & Water Supply. 3.1 Real Sector Developments Aggregate Supply The pace of growth of the Jamaican economy for the September 2017 quarter is estimated within the range of 0.5 per cent to 1.5 per cent. This estimated expansion reflected a slower rate of growth when compared to the corresponding period of 2016 (see Figure 10 and Table 3). All industries are estimated to have grown, with the exception of Mining & Quarrying, Agriculture, Forestry & Fishing and Producers of Government Services. Figure 10: Real GDP Growth (12-Month Per cent Change) Both tradable and non-tradable industries are adjudged to have expanded for the review quarter with the tradable sector estimated to have registered a faster pace of growth when compared to nontradables (see Figure 11). 1 The growth in the tradable industries was mainly attributed to Hotels & Restaurants and Manufacturing while the estimated increase in the non-tradable industries was primarily associated with positive performance in Electricity & Water Supply, Finance & Insurance Services and Real Estate, Renting & Business Activities. Figure 11: GDP Growth: Tradable vs. Non- Tradable Industries (12-Month Per cent Change) Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Source: STATIN and Source: 1 The tradable industries include Agriculture, Forestry and Fishing (traditional export crops), Mining & Quarrying, Manufacturing, Hotels & Restaurants and Transport, Storage & Communication. Non-tradable industries include Construction, Electricity, Gas & Water, Finance & Insurance Services, Real Estate, Renting & Business Activities, Producers of Government Services and Other Services. BOJ s estimates of the tradable industry is the sum of all tradable industries total value added while the non-tradable industry is the residual derived from the prior calculation and overall total value added for the quarter under review. 11

18 Quarterly Monetary Policy Report July to September 2017 Table 3: Industry Contribution to Growth (September 2017 Quarter) Contribution Estimated Impact on Growth GOODS to 0.5 Agriculture, Forestry & Fishing to -2.5 Mining & Quarrying to -5.0 Manufacturing to 2.0 Construction to 1.5 SERVICES to 1.5 Electricity & Water Supply to 2.5 Wholesale & Retail Trade, Repairs & Installation to 1.0 Hotels & Restaurants to 5.0 Transport Storage & Communication to 1.0 Financing & Insurance Services to 2.0 Real Estate, Renting & Business Activities to 1.0 Producers of Government Services to 0.5 Other Services to 2.0 Financial Intermediation Services Indirectly Measured to 2.0 TOTAL GDP to 1.0 Source: Figure 12: Total Stop-Over Visitor Arrivals & Visitor Expenditure (12-Month Per cent Change) Source: Jamaica Tourist Board Figure 13: Trends in Petroleum Products, Beverages & Tobacco and Food processing (12-Month Per cent Change) Continuing the strong performance observed in the June 2017 quarter, Hotels & Restaurants is estimated to have grown at a faster pace when compared to the corresponding quarter of This positive trend is mainly attributed to the performance of stop-over visitor arrivals during the period (see Figure 12).The expansion in arrivals largely reflected the impact of increased airlift into Jamaica. Value added within Manufacturing is estimated to have grown for the review quarter. This expansion reflected growth in both Food, Beverages & Tobacco and Other Manufacturing (see Figure 13). In relation to Food, Beverages and Tobacco, growth was mainly associated with increased production of non-alcoholic beverages as well as food processing, excluding sugar. Similarly, Other Manufacturing is estimated to have recorded marginal growth based on increases in metallic and non-metallic products and chemical products which was partly offset by an anticipated decline in refined petroleum products. Source: Petrojam Ltd. Electricity & Water Supply is adjudged to have expanded, albeit at a slower pace when compared to the corresponding period of 2016 (see Figure 14). In particular, there was continued growth in electricity consumption, proxied by an increase in total electricity sales. However, water production expanded at a slower pace when compared to the September quarter of Value added in Transport, Storage & Communication is evaluated to have increased for the September 2017 quarter (see Figure 15). The estimated rise in output was largely attributable to growth in the Communication sector. The performance of this sub-sector continued to benefit from increased competition and product innovation within the telecommunications market. 12

19 Quarterly Monetary Policy Report July to September 2017 Transport is anticipated to be impacted increases in cruise and air passenger arrivals into Jamaica which is offset by a decline in domestic cargo movement. Figure 16: National Housing Trust Housing Starts & Completion (12-Month Per cent change) Figure 14: Electricity Consumption & Water Production (12-Month Per cent Change) Source: The National Housing Trust Source: Jamaica Public Service and National Water Commission Figure 15: Visitor Arrivals & Domestic Cargo Movement (12-Month Per cent change) chiefly reflected in domestic crop production, the impact of which was partly offset by a marginal growth in traditional export crops (see Figure 17). The decline in domestic production was largely associated with the lagged impact of heavy rains which took place in mid-may The industry was also adversely affected by the impact of agriculture pests. The growth in traditional export crops for the third quarter of 2017 was mainly reflected in coffee and banana. Figure 17: Domestic & Export Crop Production (12-Month Per cent Change) Source: The Port Authority of Jamaica & Jamaica Tourist Board Construction is estimated to have expanded for the September 2017 quarter. This performance was largely driven by residential construction as well as the construction and rehabilitation of roads. Growth in residential construction was attributed to a rise in housing starts managed by the National Housing Trust (see Figure 16). Agriculture, Forestry & Fishing is assessed to have declined for the review period relative to the growth recorded in September This contraction was Source: & Ministry of Agriculture Mining & Quarrying is assessed to have declined for the September 2017 quarter reflecting a contraction in alumina production due to lower capacity utilization (see Figure 18). The decline in alumina production largely reflected operational challenges 13

20 Quarterly Monetary Policy Report July to September 2017 at one of the plants. In contrast, the production of crude bauxite increased during the period consequent on increased demand from added refinery capacity. Figure 18: Trends in Crude Bauxite, Alumina & Total Bauxite Production (12-Month Per cent Change) Net External Demand is assessed to have expanded over the review quarter, reflecting a faster pace in exports growth relative to imports (see Figure 21). The increase in exports largely reflected expansions in the volume of bauxite, alumina and cocoa as well as increased travel and transportation net inflows. This impact was partly offset by declines in the volume of coffee and banana. Growth in imports was mainly attributable to capital goods and consumer goods. Figure 19: Remittance Inflows, Real Personal Loans and Total Credit Card Transactions: (Real Values) (12-Month Per cent Change)* Source: Jamaica Bauxite Institute Aggregate Demand For the September 2017 quarter, Aggregate Spending is estimated to have increased at a slower pace when compared to the corresponding quarter of This assessment reflects estimated improvements in Net External Demand and Private Consumption, the impact of which was partly offset by declines in Gross Fixed Capital Formation and Public Consumption. *Growth in Personal loans excludes the addition of JN Bank. Source: and STATIN Figure 20: Business and Consumer Confidence Index (12-Month Per cent Change) Growth in Private Consumption was inferred from real increases in the value of credit card transactions, remittance inflows and personal loans (see Figure 19), supported by a trend improvement in consumer confidence (see Figure 20). The decline in Gross Capital Formation was inferred from a contraction in direct investment. This was partly offset by an increase in Central Government s capital expenditure. With respect to the decline in Public Consumption, this was deduced from lower real spending on goods and services by the government in the context of its continued fiscal consolidation initiatives. Source: and Jamaica Chamber of Commerce 14

21 Quarterly Monetary Policy Report July to September 2017 Figure 21: Trends in Exports & Imports of Goods and Services (US$ Millions) The risks to the forecast remain skewed to the downside. These include the non-materialization of investment projects, unanticipated production disruptions, unfavourable weather conditions, and slower than anticipated growth in the economies of Jamaica s main trading partners. Upside risks to the forecast include an improvement in global growth as well as the potential for greater foreign and domestic investment in growth-inducing activities. Source: and STATIN Outlook Over the forecast horizon to end-september 2019, real GDP growth is projected to trend below capacity conditions until the June 2018 quarter where the economy is expected to grow in line with potential. Subsequent to the June 2018 quarter, demand conditions are anticipated to improve even further. In this context, for FY2017/18, real economic activity is forecasted to expand within the range of 1.0 per cent to 2.0 per cent and further strengthen to a range of 2.0 per cent to 3.0 per cent for FY2018/19. The pace of expansion is predicated on sustained growth in the economies of Jamaica s major trading partners, further improvement in labour market conditions as well as growth in aggregate spending. Growth is mainly expected to be reflected in Hotels & Restaurants, Mining & Quarrying, Manufacturing and Electricity & Water Supply. Significant growth in mining is anticipated as greater alumina production is expected with the addition of operations at Alpart. In addition, higher capacity utilization at existing plants is assumed as operational challenges are resolved. For Hotels & Restaurants, growth is predicated on projected high levels of visitor arrivals and expenditure. In addition, a recovery in Agriculture is anticipated in the December 2018 and ensuing quarters. 3.2 Monetary Policy, Money and Financial Markets Monetary Policy (BOJ) continued to improve its monetary policy framework during the September 2017 quarter. Effective 01 July 2017, the Bank transitioned its policy rate to the rate on the overnight deposit (O/N) from the 30-day Certificate of Deposit (CD). The move was intended to strengthen the monetary transmission mechanism. The Bank continued to offer the 30 day CDs to qualified financial institutions. However, effective 28 July 2017, the BOJ began issuing these instruments in fixed volumes via competitive multiple price auctions. On 25 August 2017, the BOJ reduced its new policy rate to 3.50 per cent from 3.75 per cent (see Figure 22). This policy action reflected the Bank s assessment that inflation pressures were contained and that inflation will fall within its target range of 4.0 per cent to 6.0 per cent. The Government s strong commitment to fiscal consolidation under the precautionary Stand-By Arrangement with the IMF supported the Bank s accommodative monetary policy stance. 2 2 The continued tight fiscal policy posture supports an easing in monetary conditions. 15

22 Quarterly Monetary Policy Report July to September 2017 Figure 22: Interest Rate on BOJ s Certificates of Deposit 10.0 sale operations of US$155 million, which absorbed $20.1 billion from the system Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Table 4: BOJ Liquidity Facility (J$ Billions) Mar-17 Qtr. Jun-17 Qtr. Sep-17 Qtr. BOJ Repo Day OTROs Other day CD Overnight CD SLF Repo Source: In keeping with the policy rate reduction, the rate on the Bank s Standing Liquidity Facility (SLF) was reduced by 25 basis points (bps) to 6.50 per cent, thereby maintaining the width of the interest rate corridor (IRC) at 3.0 percentage points. 3 The excess funds rate (EFR) was however maintained at 9.30 per cent. The introduction of fixed volume auctions for BOJ s 30-day CD, resulted in increased demand for the O/N deposits by some institutions to meet liquidity requirements. Consequently, the average placement on O/N deposits increased to $35.8 billion for the September 2017 quarter from $17.8 billion in the previous quarter. Given the fairly liquid system, the weighted average interest rate on the Bank s 14-day repos declined by 113 bps for the quarter to 4.76 per cent. During the September quarter, the BOJ net injected $27.4 billion into the system mainly reflecting net FX purchases of US$318.0 million (or $40.8 billion) which was partly offset by absorption from OMO operations of $9.3 billion (see Table 4). Total liquidity expansion from BOJ operations was partly offset by absorption from GOJ Operation of $30.0 billion due predominantly to tax receipts. The resulting liquidity expansion from net FX purchases was in spite of standard and flash B-FXITT (BOJ Foreign Exchange and Intervention Trading Tool) OMOs (Other) O/N CDs * FR CDs VR CDs USD Indexed Notes BOJ FX (incl. PSE) Foreign Currency Purchases Foreign Currency Sales BOJ (Other) Net BOJ Operations (Inject/Absorb) GOJ Operations Net Total Operations (Inject/Absorb) The Bank issued new 3-, 5- and 7-year US dollar CDs during the September 2017 quarter as well as re-opened corresponding issues from the March 2017 quarter. Total placements during the period amounted to US$77.2 million with strong preference for the longest tenor (see Table 5). This contrasts with the June 2017 quarter when the BOJ refrained from issuing new US CDs, notwithstanding maturities of US$26.4 million on the shortest tenor. There were no US CD maturities for the review period. Table 5: Placements & Maturities of BOJ USD Instruments April June 2017 July September 2017 Placements Maturities Average Placements Maturities Average (US$MN) (US$MN) Rate (%) (US$MN) (US$MN) Rate (%) 3-year year year TOTAL Source: 3 The lower bound of the IRC is determined by the interest rate on the overnight CD, whilst the upper bound is determined by the rate on overnight SLF. 16

23 Quarterly Monetary Policy Report July to September Financial Markets An overall improvement in liquidity conditions, the lowering of BOJ s policy rate and continued strong demand for liquid assets during the September 2017 quarter contributed to declines in all private money market rates. The monthly averages of the interbank, overnight and 30-day private money market rates fell by 17 bps, 44 bps and 159 bps, respectively. There were also declines of 79 bps, 68 bps and 18 bps in the yields on the 90-day, 180- day and 270-day GOJ Treasury Bill (T-Bill) to 4.98 per cent, 5.45 per cent and 6.32 per cent, respectively (see Figure 23). Figure 23: Selected Market Interest Rates 9.0 Corridor 8.0 SLF Repo 7.0 Overnight CD movement during the quarter reflected appreciation of 0.3 per cent during July 2017 and depreciation of 1.1 per cent and 0.2 per cent in August and September 2017, respectively (see Figures 24 and 25). The uptick in the pace of depreciation during the quarter occurred in a context of seasonally higher demand related to BOP current account transactions, as well as dealers positioning to acquire a number of US dollar instruments. This pressure was subsequently attenuated, in large part, by the GOJ s early redemption of domestic foreign currency instruments amounting to US$514.0 million on 18 August Market conditions were also eased by B-FXITT sales during the quarter. Figure 24: WASR of Select Major Currencies (e.o.p.) (12 month point-to-point) depreciation day T-Bill 90-day T-Bill 180-day T-Bill 30-day CD 30-day PMMR O/N PMMR O/N Interbank 14-Day Repo appreciation BOJ SLF Rate BOJ 30- day CD BOJ O/N CD O/N PMMR O/N Int. Bank 30-day PMMR 30-day T-Bill 90-day T-Bill Foreign Exchange Market 180- day T- Bill The weighted average selling rate of the Jamaica Dollar vis-á-vis the US dollar closed the September 2017 quarter at J$ = US$1.00. This reflected depreciation of 1.0 per cent relative to the previous quarter and 1.3 per cent relative to the corresponding period of the previous year. The 270- day T- Bill Sep Dec Mar Jun Sep Source: Notes: (i) PMMR is the private money market rate (ii) O/N is the overnight rate in the market accessible by all financial institutions while the interbank rate (I/B) is the overnight rate accessible only by banks. + Reflects average rate for the month. Source: Notes: + = depreciation and = appreciation Notwithstanding the faster pace of depreciation relative to the June 2017 quarter, conditions in the foreign exchange market improved. This was reflected in net outflows from the market of US$79.9 million relative to US$142.1 million for the previous quarter and was underpinned by lower portfolio outflows, partly offset by an increase in demand to satisfy BOP current account transactions. During the September 2017 quarter, BOJ fully implemented its new tool for the sale and purchase of foreign currency to authorized dealers and selected cambios, following the pilot auction that was held on 28 June The new mechanism, called s Foreign Exchange 17

24 Quarterly Monetary Policy Report July to September 2017 Intervention and Trading Tool (B-FXITT), is designed to enhance price-discovery, deepen the interbank foreign exchange market and provide greater market efficiency and transparency. 4 The full auctions, which officially began on 26 July 2017, allow participants to bid at multiple prices. In this regard, successful bidders are able to purchase foreign exchange at a rate decided by these participants. The Bank conducted 11 auctions during the quarter, offering a total of US$155.0 million. Of note, this included a flash auction of US$35.0 million on 31 August sector entity facility for authorised dealers and cambios. The reduction in the surrender requirement, in conjunction with B-FXITT is in keeping with the Bank s ongoing reforms to enhance the transparency and efficiency of the foreign exchange market. Figure 25: Movements in the WASR and Net Demand Importantly, B-FXITT was introduced during a period of strong demand for foreign currency. This influenced the Bank s sale of US$240.0 million in May Subsequent to that intervention, the early redemption of GOJ bonds and the full operationalization of B-FXITT, there has been more balanced movement in the exchange rate consistent with the rate being fairly valued. This improvement in market conditions should also serve to limit instances of speculative foreign exchange demand and disorderly exchange rate movements. also took further steps during the quarter to improve its market intelligence as well as its communication strategy. In this regard, a meeting was held with market participants on 04 October In an effort to further strengthen price signaling, the Bank began to calculate and announce a mid-day market rate on 25 September This rate is used in BOJ s transactions with the market and selected public entities. The midday rate has now become the rate at which banks and selected cambios sell foreign exchange to the BOJ under their surrender requirements. This contrasts with the earlier use of the weighted average rate of the previous day and guarantees that surrenders are effected at rates closer to what obtains in the market. Source: Notes: (i) Net demand includes purchases and sales within the market At end-september 2017, there was an estimated gain of 0.8 per cent in Jamaica s external price competitiveness, as measured by BOJ s real effective exchange rate (REER), relative to end- September This real depreciation represented a reversal relative to the estimated loss of 1.0 per cent for the June 2017 quarter. 6 The gain in competitiveness occurred against the backdrop of lower domestic inflation, relative to trading partners. Furthermore, the Bank expressed its intention to reduce the surrender requirement under the public 4 For further details see Box 3: BOJ s New Foreign Exchange Intervention & Trading Tool _june2017.pdf 5 An auction, outside of the given schedule, was conducted in light of a spike in demand associated with corporate bonds which were floated in the market. This coincided with high seasonal demand associated with the summer holiday and preparation for the Christmas holiday period. 6 On an annual basis, the Jamaica Dollar continued to depreciate vis-à-vis the Pound Sterling the Canadian dollar and the Euro, albeit at a faster pace than the previous quarter. There was, however, a slowdown in the pace of depreciation of the US dollar, relative to the previous year. 18

25 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Quarterly Monetary Policy Report July to September Equities Market The equities market showed growth over the September 2017 quarter. All indices on the Jamaica Stock Exchange (JSE), with the exception of the Junior Index, recorded growth ranging between 7.9 per cent and 11.8 per cent. Of note, the JSE Main Index increased by 11.8 per cent in comparison to growth of 5.0 per cent and 2.2 per cent for the prior review period and the five year annual average, respectively (see Figure 26). The performance of the equities market was influenced by continued positive macroeconomic developments, including low and stable inflation and a continued accommodative monetary policy stance. These developments were complemented by increased investor interest in company listings due to the continued expansion of some listed entities as well as Initial Public Offerings (IPOs) on both the main and junior exchanges. 7,8 private money market was 5.2 per cent as at end- September 2017 (see Figure 27). Market activity indicators for the JSE Main Index showed mixed results for the quarter ended September In particular, the value and volume decreased by 9.1 per cent, and 6.5 per cent, respectively, relative to a decrease of 2.6 per cent, and an increase of 6.7 per cent for the previous quarter. Figure 27: Returns from Private Money Market, GOJ Global and Capital Gains/ (Losses) from JSE Main Index (Per cent) day Private Money Market Rate Quarterly Change in the Main JSE Index Weighted Average GOJ Global Bond yields and foreign currency gains (losses) Figure 26: Quarterly Growth of the JSE Indices (Per cent Change) JSE Main Index ALL JA SELECT Junior Market JSE Combined Index Source: Jamaica Stock Exchange Moreover, investments in equities continued to provide greater returns relative to foreign currency and domestic money market investments. 9 In particular, equities offered an average quarterly return of 10.6 per cent while GOJ global bonds offered an average return of 0.7 per cent. Additionally, the average interest rate on the 30-day Source: Jamaica Stock Exchange and Bloomberg Meanwhile, the number of stocks traded for the review period increased by 5.9 per cent for the end- September 2017 quarter, relative to an increase of 8.3 per cent for the previous quarter (see Figure 28). Figure 28: Quarterly Change in the Monthly Volumes, Values & Number of Transactions (Main JSE Index) (Per cent) Volume Values traded No. of Transactions Source: Jamaica Stock Exchange 7 There was approval of stock splits by Carreras limited as well as consideration and approved of dividend payment by several companies trading on both the main and junior markets. 8 There were a number of IPOs over the review period (i) Main Market: a. Productive Business Solutions (PBS); (ii) Junior Market: a. Stationery & Office Supplies (SOS), b. Express Catering. 9 Returns per asset class are calculated as the quarterly point-topoint change. The return on equities is computed based on the JSE Main Index. The returns on foreign currency investment are calculated based on the weighted average bond yields of all GOJ Global Bonds. 19

26 Quarterly Monetary Policy Report July to September 2017 The positive performance of the equities market was also demonstrated in the advance to decline ratio of 16:13 for the September 2017 quarter. Stock market price appreciation continued to be broad-based and reflected the performance of stocks within five sectors. Notably, four of the seven sectors contributed to the top ten performing stocks for the review period (see Table 6). The Retail, Conglomerate and Financial categories accounted for seven of the top ten advancing stocks. In particular, the Retail category reflected the highest average price appreciation of 44.7 per cent for the September 2017 quarter relative to the previous quarter. Table 6: Stock Price Appreciation and Depreciation Appreciation Advancing Per cent Retail 44.7 Carreras Limited 44.7 Conglomerate 4.7 Sagicor Group Jamaica 6.0 Pan Jam Investments 14.5 Financial 4.5 National Commercial Bank 24.8 Barita Investments Limited 19.2 JMMB Group Limited 11.4 Scotia Group Jamaica 8.1 Other Palace Amusement 10.0 Sagicor Real Estate X Fund 14.0 Supreme Ventures 41.1 Depreciation Declining Per cent Tourism Ciboney Group Communications Radio Jamaica LIME/ Cable & Wireless -8.5 Manufacturing -6.0 Berger Paints (Jamaica) Salada Foods Jamaica Other -0.8 Kingston Properties Limited Pulse Investments Financial Sterling Investments Limited Scotia Investments Jamaica -6.0 Conglomerate Jamaica Producers Group Private Sector Credit The accommodative monetary conditions continued to support growth in credit in the financial system. The annual growth in private sector financing (including domestic and foreign currency denominated loans) by deposit taking institutions (DTIs) to the productive sector was 12.7 per cent at end-august This represented a moderation when compared to the growth of 16.8 per cent for the corresponding period in Credit growth by DTIs was primarily underpinned by the performance of commercial banks credit to the private sector which increased by 37.5 per cent. This outturn was stronger than the expansion of 14.3 per cent and 31.2 per cent recorded in September 2016 and June 2017 quarters, respectively (see Table 7). For the quarter to August 2017, private sector credit increased by 7.9 per cent. However, it should be noted that much of the increase reflected the impact of two new entrants to the commercial banking sector in the March and September 2017 quarters. Excluding the impact of these institutions, private sector credit would have grown by 10.2 per cent during the review quarter. Relative to GDP, the stock of private sector credit was 29.3 per cent compared with 23.0 per cent a year earlier. 10 Without these new entrants the stock relative to GDP would have been 24.6 per cent. Table 7: Commercial Bank Credit to the Private Sector Annual Flows (J$ mn) Sep-16 Jun-17 Sep-17^ Private Sector Credit Percentage Change (%) Private Sector Credit w/o New Entrants Percentage Change (%) w/o New Entrants Loans & Advances Percentage Change (%) Percentage Change w/o New Entrants (%) Less Overseas Residents Add Corporate Securities Source: ^ Preliminary data as at August GDP was calculated using the moving sum for the September 2017 quarter. This is the sum of the nominal value of three (3) quarters prior to September

27 Quarterly Monetary Policy Report July to September 2017 The expansion in private sector credit reflected the impact of BOJ s generally accommodative monetary policy stance and occurred in the context of increased competition in the market for loanable funds. The Bank s Quarterly Credit Conditions survey for the June 2017 quarter indicated a continued easing in credit terms, a trend which was expected to continue in the September 2017 quarter as lenders aimed to maintain or increase market shares (see Box 2: BOJ s Quarterly Credit Conditions Survey). The expansion in private sector credit for the review period reflected growth in loans and advances to both businesses and households. On an annual basis, loans and advances increased by 31.4 per cent from 14.3 per cent at September 2016 (see Table 8). However, without the inclusion of the new entrants, loans and advances expanded by 11.5 per cent. Table 8: Distribution of Total Loans & Advances to the Private Sector by Commercial Banks (J$MN) Annual Flows Sep-16 Jun-17 Sep-17^ Business Lending Percentage Change % Agriculture & Fishing ( ) ( ) Mining & Quarrying ( 175.4) Manufacturing Construction & Land Development Transport, Storage & Communication ( ) ( ) Tourism Distribution Electricity, Gas & Water Entertainment Professional & Other Services Household & Other Lending Percentage Change % Personal o/w Demand loans The relatively slower pace of credit growth was observed in credit to businesses which recorded growth of 8.3 per cent from14.0 per cent at September 2016.This moderation reflected the impact of the repayment of a large foreign currency facility by a telecommunications company at one commercial bank. In addition, the Agriculture & Fishing and Transportation, Storage & Communication sectors recorded net repayments of outstanding loans. However, these net repayments were partly offset by increased credit to the Distribution, Professional & Other Services and Manufacturing sectors. In contrast to business loans, the stock of personal loans (without the new entrants) expanded at a slightly faster annual rate of 14.8 per cent, from 14.5 per cent in the September 2016 quarter. This relatively steady growth in personal credit reflected the impact of increased demand for mortgages, term loans and instalment credit in the context of an increasingly competitive banking sector. Loans denominated in domestic and foreign currencies grew, respectively, by 36.2 per cent and 14.9 per cent at August 2017, relative to 14.0 per cent and 6.4 per cent for the comparable period in 2016 (see Figure 29). The increase in foreign currency loans occurred in the context of a slower pace of exchange rate depreciation (see exchange rate section), which may have incentivized borrowers to access foreign currency loans. Of note, growth in foreign currency credit for the review quarter was mainly reflected in the Tourism sector, while the Electricity Gas & Water sector was the main driver of local currency credit. o/w Term loans o/w Mortgage o/w Installment o/w Overdraft loans ( 276.9) ( 26.8) ( 45.3) o/w Insurance premiums ( 0.7) Overseas Residents Net Lending Annual Growth 14.3% 27.3% 31.4% Source: ^ Preliminary data as at August

28 Quarterly Monetary Policy Report July to September 2017 Figure 29: Growth in Private Sector Loans and Advances (12-month percentage changes) Per cent Abstracting for the effect of inflation on credit growth, private sector financing by DTIs grew by 8.0 per cent over the year to August 2017, compared with 14.8 per cent for the comparable period in Much of this moderation was underpinned by a slower expansion in loans extended to the productive sector by commercial banks. Of note, commercial bank loans (excluding the two new institutions) recorded an increase of 5.6 per cent in real terms, which was lower than the expansion of 12.2 per cent and 6.2 per cent recorded in the September 2016 and the June 2017 quarters, respectively (see Figure 30). With the inclusion of the new commercial banks, real credit growth of 27.1 per cent was recorded. Figure 30: Real Growth in Commercial Bank Private Sector Credit (12-month percentage changes) Source: ^ Preliminary data as at August Consistent with the increase in loans was an improvement in the quality of commercial banks 5.6 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 PSC Real Total Source: ^ Preliminary data as at August Local Currency Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 PSC Real (w/o New Entrants) loan portfolio. In particular, the ratio of nonperforming loans (NPLs) to private sector loans at end-august 2017 was 2.83 per cent, representing a fall of 1.19 percentage points, relative to end- August 2016 (see Figure 31). The decline in the NPL ratio reflected a fall of 7.5 per cent (or J$14.9 billion) in total past due loans over the 12 months to August 2016, while private sector loans grew by 37.5 per cent over this period. Figure 31: Commercial Bank Loan Quality (percentage) Per Cent Source: Money 4.02 Modest growth in the monetary aggregates was observed in the September 2017 quarter. There was robust growth of 22.4 per cent in the monetary base at end-september 2017, relative to 15.8 per cent at end-september 2016 (see Table 9). This expansion was largely reflected in increases of 11.1 per cent and 38.1 per cent in the currency stock and commercial banks cash reserves, respectively. Real currency growth moderated to 6.3 per cent from 15.3 per cent at end-september Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 NPL/Private Sector Regarding the sources of change in the monetary base, there was an increase of 27.4 per cent in the net international reserves (NIR), the impact of which was partially offset by a contraction of 30.7 per cent in the net domestic assets (NDA) (see Table 9).The increase in the NIR was influenced by buoyant USD supply associated with inflows from foreign currency 22

29 Quarterly Monetary Policy Report July to September 2017 surrenders, net prudential reserves and GOJ s debt raising initiatives on the international capital market. Some of this increase was partly offset by GOJ debt payments and market sales through the Bank s B- FXITT operations. A build-up in the stock of OMO liabilities contributed to the contraction in the NDA. Table 9: Operating Targets NIR (US$MN) Stock ($ MN) Flow (%) Sep-16 Jun-17 Sep-17 Qtr o- Qtr Y-o-Y 2, , , NIR(J$MN) 314, , , Assets 389, , , Liabilities (75,668.0) (72,567.2) (73,709.9) 1.6 (2.6) Net Domestic Assets - Net Claims on Public Sector - Net Credit to Banks - Open Market Operations (189,093.3) (186,807.0) (247,053.8) (32.3) (30.7) 142, , , (10.6) (34,134.6) (59,333.2) (60,976.3) (2.8) (78.6) (47,688.3) (87,060.1) (96,355.9) (10.7) (102.1) - Other (249,862.6) (221,644.7) (217,201.4) o/w USD FR CDs (99,309.4) (85,871.5) (81,769.7) is estimated at 23.4 per cent, compared with 18.7 per cent at September The measure of broad money supply that includes foreign currency deposits (M2 * ) also recorded stronger annual growth of 23.7 per cent. Excluding the new entrants the growth in M2 * decelerated to 10.9 per cent, compared with 16.3 per cent at end- September The primary source of this deceleration was a moderation in the rate of increase in foreign currency deposits to 11.1 per cent (excluding the new entrants) from 21.3 per cent a year earlier. Resulting from the slower growth in foreign currency deposits, coupled with a faster pace of growth in total deposits, the deposit dollarisation ratio for commercial banks, trended downwards to 43.7 per cent as at August 2017 from 47.4 per cent and 46.6 per cent at August 2016 and June 2017, respectively. The exclusion of the two commercial bank entrants on deposits would have resulted in a dollarisation ratio of 44.9 per cent at August Monetary Base 125, , , Currency Issue 82, , , Cash Reserve 41, , , Current Account , , Source: Broad money supply, as measured by M2J, recorded annual growth of 29.6 per cent for the review quarter, compared with an expansion of 13.1 per cent for the corresponding quarter of However, much of this increase reflected the inclusion of deposits from the two new commercial banks. Excluding this effect, M2J would have expanded by 16.5 per cent. Growth in M2J was largely underpinned by an increase of 35.2 per cent in local currency deposits, which primarily reflected growth of 68.3 per cent in commercial banks time deposits. The exclusion of the two commercial bank would have resulted in a more modest growth in time deposits of 11.3 per cent. For the September 2017 quarter, broad money supply, relative to GDP, 23

30 Quarterly Monetary Policy Report July to September 2017 Box 2: Quarterly Credit Conditions Survey Overview s survey indicated that credit conditions eased marginally during the June 2017 quarter, albeit at a more moderate pace than was anticipated (see Figure 1). Lenders reported that the easing in credit conditions continued to reflect improvements in lending policies for both secured and unsecured loans in an effort to increase their market share in a more competitive market, while maintaining the quality of their loan portfolios. The more relaxed terms on secured loans were evident in reductions in interest rates and fees and an increase in credit lines and repayment periods. For unsecured loans, the easing in lending policies was evidenced by lower interest rates on non credit card loans, reductions in the minimum balance repaid and increases in credit card limits. The impact of this easing was, however, partially offset by an increase in fees. The outlook for the September 2017 quarter is for marginal easing in credit conditions, relative to the June 2017 quarter. Figure 1: Index of Credit Conditions Credit Supply The overall Credit Supply Index (CSI) moderated to for the June 2017 quarter from in the previous quarter (see Figure 2). This moderation was primarily due to a fall in credit supply to micro and small businesses, relative to the previous quarter. For these firms, the contraction in supply was evident in local currency loans for most economic sectors as lenders risk tolerance moderated relative to the previous quarter. However, institutions willingness to provide credit to individuals as well as large and medium sized firms continued to be driven by their economic outlook, market share objectives and competition during the quarter. Figure 2: Credit Supply Indices CSI Dec-15 Jun-16 Dec-16 Jun > 100: Easing of Credit Conditions Supply to Businesses Credit Supply Index (CSI) Supply to Individuals CSI Expectations Source: s Quarterly Credit Conditions Survey Notes: (i) *-Expectations for the upcoming quarter indicated by respondents in the previous survey and (ii) Indices greater than 100 indicate an increase in the variable while an index less than 100 indicates a decline < 100: Tightening of Credit Conditions Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17* Expected Overall Credit Terms Secured Credit Unsecured Credit Overall Credit Terms In the context of the foregoing, there was a redistribution of credit made available to large and medium-sized firms from micro and small firms. This resulted in relatively no change in the proportion of credit allocated to businesses and individuals during the June 2017 quarter, relative to the previous quarter (see Figure 3). Source: s Quarterly Credit Conditions Survey Notes: (i) The asterisk (*) represents forward looking expectations provided by the respondents for the December 2016 quarter. (ii) The index is the average response for changes in eight credit terms reported in the Credit Conditions Survey. (iii) An index greater than 100 indicates an easing of credit conditions while an index below 100 indicates a tightening of market conditions. For the September 2017 quarter, lenders planned to increase the amount of credit made available to prospective borrowers, especially for businesses. This outlook was premised on creditors plans to 24

31 Quarterly Monetary Policy Report July to September 2017 maintain or increase market share in the context of new entrants in the banking sector. The increased supply is expected to be distributed across all business sizes for most economic sectors. Figure 3: Distribution of Private Sector Loans 100% 80% 60% 40% 20% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 42% 58% 18.4% 69.9% 41% 59% 17.7% 72.0% 38% 62% 11.2% 9.8% 11.1% 8.5% 10.1% 9.2% 9.5% 10.8% 8.1% 31.1% 57.4% Large Businesses 46% 54% Business Loans 29.0% 61.9% 45% 55% 29.5% 59.2% 46% 54% 27.9% 62.3% 47% 53% 29.4% 60.3% 48% 52% Personal Loans 28.9% 58.5% 48% 52% Medium Businesses 30.3% 60.8% demand for personal loans. Lenders reported that the increased demand for these loans was a reflection of borrowers positive outlook on the domestic economy. In contrast, demand for local currency business loans remained tepid in the quarter due to a contraction in the demand for credit from the Agriculture & Fishing, Manufacturing, Tourism and Entertainment sectors. There was, however, increased demand from the Professional & Other Services, Construction and Transportation sectors. The demand for foreign currency credit remained relatively unchanged from the previous quarter as strong demand from the Construction, Tourism and Distribution sectors was offset by a contraction in demand for loans from the Mining & Quarrying and Entertainment sectors. Lenders reported that borrowers remained sensitive to interest rates and cited that the stability in the exchange rate in the month of June drove foreign currency earners to increase their demand for foreign currency loans to help offset their local currency liquidity challenges. Credit demand continued to be driven by factors such as increased business activities, loan promotional activities, lower interest rates and developments in various economic sectors. Figure 4: Credit Demand Indices 135 CDI Demand by Businesses Demand by Individuals Credit Demand Index (CDI) Small Businesses Micro Businesses 115 Source: s Quarterly Credit Conditions Survey Notes: Figure 3 shows the distribution of credit between households and businesses. Credit to businesses was further disaggregated to show total business loans distributed to firms of various sizes. 95 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17* Credit Demand Growth in credit demand, as measured by the Credit Demand Index (CDI), increased at a faster pace relative to the March 2017 quarter (see Figure 4). This expansion in credit demand was reflected in an increase in the CDI to from101.5 in the previous quarter and mainly reflected increased Source: s Credit Conditions Survey Notes: *Expectations for the upcoming quarter indicated by respondents in the previous survey and (ii) Indices greater than 100 indicate an increase in the variable while an index less than 100 indicates a decline. 25